Global Cord Blood (CO) Q4 2018 Earnings Conference Call Transcript

Global Cord Blood (CO -3.85%)
Q4 2018 Earnings Conference Call
Jun. 27, 2018 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome, everyone, to Global Cord Blood Corporation's earnings conference call for the fourth quarter and full year of fiscal 2018. All participants' lines will be placed on mute during the presentation, after which there will be a question-and-answer session. Now I would like to introduce Ms. Kathy Bian, VP of corporate finance, to begin the presentation.

Kathy Bian -- Vice President Corporate Finance

Thank you and good morning, everyone. Welcome to our fourth-quarter and fiscal 2018 earnings conference call. A press release discussing our financial results has already been published and a copy is available on our company's website. During the call, our management team will summarize corporate development and financial highlights for the quarter.

A question-and-answer session will follow. Before we begin, please note that today's discussion will contain forward-looking statements that are subject to certain risks and uncertainties, and actual results could be materially different from these forward-looking statements. Kindly refer to our SEC filings for detailed discussions of the potential risks. In the interest of time, we will begin with our CEO's remarks, followed by a detailed report of the fourth quarter of fiscal 2018 financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the Q&A session. Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation.

Good morning shareholders, investors and analysts, ladies and gentlemen, welcome to Global Cord Blood Corporation's fiscal 2018 fourth-quarter earnings conference call. Fiscal fourth quarter is traditionally considered our low season, but we managed to achieve pleasing results by leveraging our strong brands and intensifying our sales and marketing activities. During the reporting quarter, we recruited 21,319 new subscribers, up 4% year over year. Guangdong market drove the growth.

In fiscal 2018, we recorded 91,789 new subscribers in total, up 23% year over year, a result that marked a new record in terms of annual new subscribers. By the end of March 31, 2018, our Accumulated subscribers had reached eight -- sorry 661,618, reinforcing our leading position. There are a couple of points to keep in mind as we move into fiscal 2019. After the recent ramp-up in volume, we believe the market will take a breather before penetration jumps into another level.

This is because it takes time to build market awareness, and volume tend to leapfrog when public acceptance toward the cord blood banking hits another critical mass. Hence, we are likely to experience some level consolidation in terms of new subscriber numbers at this historical high level. In addition, if the U.S.-China talk -- trade talk, which already dampens the market sentiment, continues to drag, it may impact the economy in China, erode consumer confidence, and inhibit purchasing behaving -- behavior rapidly. That said, we intend to counter this fact -- forces by driving growth, within our various geographical regions through adjusting and localizing our marketing campaigns, since each market is in a different phase of growth.

In Guangdong province, the productivity fact [ph] of the second-child policy continued to manifest itself during fiscal 2018. Given its large population base and uninterrupted urbanization trend, we expect Guangdong to remain the driving market of our new subscribers in fiscal 2019. We also expect both the number of births and new subscriber numbers in Zhejiang province to grow steadily in fiscal 2019. On the other hand, we do not foresee exciting performance in the Beijing market, as we anticipate newborn numbers to continue to trend downward due to fundamental constraints.

Therefore, we will take different approaches to growth in accordance with each market's distinct situation to explore each market's potential. We will strengthen and broaden our hospital channels, seek innovative recruitment tools to cater the needs of divergent client base, and upgrade sales and marketing activities to improve penetration in the existing markets while keeping expenses in check. All in all, we aim to achieve 85,000 to 90,000 new subscribers in fiscal 2019. As many shareholders are aware, the board of directors of the company has been constantly reviewing the company capital structure, with the purpose of balancing the long-term development needs against efficient capital deployment.

We strongly believe a sustainable and predictable capital-deployment policy will best serve the company and our shareholders. After much deliberation, taking into account our near-term and long-term strategic goals and to celebrate fiscal 2018 for being another record year, the board is delighted to have declared a dividend of $0.8 per share, payable in cash or the company's ordinary shares at the election of our shareholders. This concludes my remarks regarding our fourth-quarter results. I'd like to thank you for your ongoing support of GCBC.

I will now turn the call over to our CFO, Mr. Albert Chen, to review our fourth-quarter financial performance in greater detail.

Albert Chen -- Chief Financial Officer

Good morning, everyone.Thank you for joining our call today. In the fourth quarter, revenues increased by 15% year over year to RMB 233 million. Fourth-quarter storage revenue increased by 20% year over year to RMB 86 million, as our net accumulated subscriber base surpassed the 661,000 mark as of March 31, 2018. Storage revenue accounted for 37 % of total revenue, up from 36% of last year.

Fourth-quarter processing revenues increased by 13% year over year to RMB 147 million as we recruited 21,390 new subscribers, with Guangdong division remained the largest contributor in terms of new-subscriber mix. As economies of scale outpace the increase in raw-material costs, fourth-quarter gross profit increased by 17% year over year to 198 -- RMB 189. Modest increase in storage fees as a percent of revenue enabled gross margin to edge up from 80% last year to 81% in the reporting quarter. Operating income decreased to RMB 42 million because of the additional share-based compensation expenses recognized during the quarter.

Fourth-quarter operating income, before depreciation and amortization and share-based compensation expenses, which we also refer to as the non-GAAP operating income in our earning release, actually jumped by 22% year over year to approximately RMB 103 million, on the back of robust top-line growth and margin improvement. Non-GAAP operating income margin increased accordingly from 42% to 44%. All the outstanding RSU were vested in the reporting quarter, therefore, share-based compensation expenses for the period increased to RMB 48 million from RMB 16 million last year. Going forward, there will be no more amortization of share-based compensation from these RSUs, which normally cost around RMB 20 million a quarter.

And the total number of shares outstanding as of March 31, 2018, is 120.8 million. Depreciation and amortization expenses in the fourth quarter maintained at RMB 13 million level. In the fourth quarter, our sales and marketing expenses increased by 11% year over year to RMB 60 million, which was mainly attributable to the increase in share-based compensation awarded to the sales force. Excluding the share-based compensation expense, sales and marketing expenses only increased modestly despite our escalated sales and marketing activities.

General and administrative expenses for the fourth quarter increased to RMB 84 million from RMB 48 million last year. The increase was once again related to the increase in share-based compensation expense. Excluding such impact, G&A expenses as a percentage of revenue only increased marginally. In the fourth quarter of last fiscal year, we recorded income tax benefit of RMB 4 million as a result of the income tax provision reversal, but no such reversal was recorded during the reporting quarter.

Excluding the effect of such reversal, income tax expense was RMB 14 million in the fourth quarter of last year, compared to RMB 17 million in the current quarter. With the decrease in operating income, accompanied with the increase in income tax expense, which were partially offset by the absence of interest expense, net income attributable to the company's shareholders for the reporting quarter was RMB 31 million, compared to RMB 38 million last year. Taking into account the shares issued upon vesting of the RSUs and the CP conversion back in April 2017, basic earnings per ordinary share for the reporting quarter were RMB 0.27, compared to RMB 0.45 last year. Diluted earnings per ordinary share for the reporting quarter were RMB 0.25, compared to RMB 0.45 last year.

As of March 31, 2018, the company had cash and cash-equivalent of approximately RMB 4.3 billion. Total deferred revenue were approximately RMB 2.2 billion. Net cash provided by operating activities for the reporting quarter was RMB 194 million. As mentioned in the CEO remarks, the board declared a dividend of USD 0.08 per ordinary share to be paid in cash or in scrip at the election of the shareholders.

The dividend will be payable on August 20, but in any event, no later than August 24, 2018. And the record date is set on July 30, 2018. Election form and dividend scheme are now available in our website for your -- for shareholders' review. And these pretty much wrap up my -- the highlight of the results, and I'm happy to take any questions that you may have.

Questions and Answers:

Operator

Thank you, Albert. [Operator instructions] Your first question comes from Ryan Roberts from MCM Partners. Your line is now open, Ryan, please go ahead.

Ryan Roberts -- MCM Partners -- Analyst

Good evening. Thanks for taking my question. I just had a couple of quick questions. First one was kind of on the top-line color shared during the prepared remarks about kind of some consolidation expected.

I'm just kind of curious, looking at the seasonality of new subscriber acquisitions, it looks like, actually, in the past couple of years, Q4 hasn't seen a drop as sharp as was recorded in Q4 of '18, relatively -- sequentially fell about 12% versus a 4% rise in '17 and a 7% drop in '16. I'm just kind of curious if you can give us some more color on what you're seeing in the market. Is this more of a saturation issue or there are some other factors at play? Then I have a follow-up. Thank you.

Albert Chen -- Chief Financial Officer

Thank you for the questions. It's hard to actually just simply predict the quarter-over-quarter performance based on historical because our past experience suggests that because of the Chinese zodiac calendar issue, it tends to distort the picture. But our past experience do suggest that it seems like, for example, the -- from first of July to the end of December tend to be our [Inaudible] moment, which accounts for slightly more than half of the full year. Where, from our perspective, first quarter and the fourth quarter of our fiscal year tend to be what we call a slack season on the relative scale.

So now with that being said, you will notice in our prepared CEO remarks, we talked about markets consolidating and leapfrogging again. Part of the reason we want to highlight that to investors is because cord blood banking is a very interesting and unique business model. Every six months, you're faced with a bunch of new clients and you have to reeducate them again. So past experience do suggest that the way we grow is not directly a linear function, but instead our growth pattern seems to mimic what we call a step function, where you have -- where you reach certain penetration level and you stay there for a couple of years.

And once you hit critical mass, you jump to another penetration level. So that tends to be the case for cord blood banking, at least in the area where we operate. I hope this helped to address some of your questions.

Ryan Roberts -- MCM Partners -- Analyst

It did. Thank you for the color. The zodiac is always an interesting dynamic there, for sure. Maybe just kind of more technical one, just a follow-up on kind of the monetization side of things.

I'm just curious if there's anything happening on prices. It looks like revenue -- processing and other revenue for the kind of new subscriber was moving around a little bit in Q4. I'm just kind of curious if you're doing anything on the pricing side to influence that.

Albert Chen -- Chief Financial Officer

Normally, the average or the ASP per new clients get affected because of the sales catalog and when we issue the testing results to the client. At least from, say, from a management perspective, I can tell you that we are not doing anything funny on pricing. We are not revising up or lowering our pricing. But that has -- but that kind of seasonality tend to go away.

For example, sometimes, this quarter is higher than next quarter, and now in the following quarter, it come back down again. When you pool the yearly average, it tends to kind of average out. So it's probably about 6,800 times 0.94, it stands about -- growth about 6,500.

Ryan Roberts -- MCM Partners -- Analyst

Gotcha. OK. If I could just maybe sneak one last one in. Should we read anything into the dividend? Is this a one-time thing that is potentially something we could look for in the future? And if management can share some color on capital allocation and use of cash in the balance sheet, that will be much appreciated.

And that's all from me.

Albert Chen -- Chief Financial Officer

Thank you for the questions. As many of you are aware, that we have tried share repurchases in the past. And we have constantly reviewed our capital-allocation strategy. And we have to examine our capital-allocation decisions in light of our business expansion opportunities as well as our own development strategies.

Now many of you may be aware that we are a -- well, fair to say that we are a bunch of extremely prudent people. We don't want to do anything radical. To the extent possible, we want to maintain a policy that is predictable with certain level of transparency. Now with that being said, there's no guarantee that we're going to do this dividend again next year, but this is certainly something that we want to, to the extent possible.

Sorry, I'm not allowed to give you a direct answer, so I apologize for that.

Ryan Roberts -- MCM Partners -- Analyst

It's OK.

Operator

Thank you, Ryan. Your next question comes from Michael Schmitz from Jayhawk Capital. Michael, you're now -- line is now open, please go ahead.

Michael Schmitz -- Jayhawk Capital -- Chief Financial Officer

Hi, Albert. Thanks for taking the time here. Another good quarter all in all, so congratulations on that. Could you provide the rough breakdown by province of the new subscribers, as you have done in the past?

Albert Chen -- Chief Financial Officer

No problem, Mike. In terms of new subscriber breakdown, you're looking at about 60% to 62% from the Guangdong province, 20% from Zhejiang, and the rest from Beijing.

Michael Schmitz -- Jayhawk Capital -- Chief Financial Officer

Thank you. And then kind of following on the dividend question, I think you just mentioned that you hope to do it again next year. So would that be to expect that this is not a quarterly dividend, it's more of an annual review, and you'll make a decision each year as to what the dividend will be?

Albert Chen -- Chief Financial Officer

It's something that we are constantly reviewing internally. So fair to say this is the first time we do it. And we will continue to -- we will examine the market reaction, and we'll take into account investors' feedback and shareholders' feedback about these propositions and, to the extent possible, fine tune it going forward. So we don't have a definitive answer to your question, honestly, Mike.

But whatever we do, we try to make this a long-term, sustainable and predictable pattern so that it will be easier for management, for budgeting purposes and also easier for shareholders as well. That's how we work.

Michael Schmitz -- Jayhawk Capital -- Chief Financial Officer

Sure. I think that makes sense. I think, obviously, my comment on that would be that providing some guidance now as to what you would hope to be able to do would be kind of in line with that thinking of being transparent. And obviously, roughly $10 million dividend when you're generating $30 million of cash a quarter is very sustainable from that standpoint.

So I would appreciate any further comments you can make on that. And then on a related note, I think you also kind of mentioned that share repurchases have been tried in the past. Have those been kind of ruled out for the foreseeable future? Or is that something that's still being discussed at the board level as well?

Albert Chen -- Chief Financial Officer

It's part of the capital-allocation decisions when we enter into that kind of discussion. We have no intention of ruling out share repurchases for good. But it's just that we think that this is -- we hope shareholders will prefer a dividend payment, so that's why we do it this time.

Michael Schmitz -- Jayhawk Capital -- Chief Financial Officer

OK. Thanks. I have no further questions right now.

Operator

Thank you, Michael. Your next question comes from Peter from Heng Ren. Peter, your line is now open, please go ahead.

Peter Halesworth -- Heng Ren -- Portfolio Manager

Hi, yes. Albert, on the dividend and the capital allocation, this is only a tiny first step. And some of the other shareholders are just dancing around the issue because they'll be griping later when we talk. But for five years, this company has had a bloated balance sheet with way too much cash on it.

And to say that you're careful and considerate and deliberate about the capital allocation and the dividend is comical. You've been considering this and being pushed by shareholders for five years to get your balance sheet right. And here we are with a $10 million dividend, and you generated $130 million in free cash this year. It's ludicrous.

And I think, today, on this call, the company needs to put their hand over their heart and pledge to commit to shareholders for once. Would you do that?

Albert Chen -- Chief Financial Officer

Well, I mean, I think if you look at the -- as you kindly pointed out, the dividend returns approximately about USD 10 million, it's actually about 27% -- 26%, 27% of our full-year earnings. So I guess this will be a good starting point.

Peter Halesworth -- Heng Ren -- Portfolio Manager

We've been saying, that you've been saying this for five years. Shareholders have been putting up with this for several years. It's been tiptoed and danced around, and we've been put off and dodged on a very critical issue for your share-price performance for five years. The time is up.

It's time to commit to shareholders and reallocate capital to shareholders. You won't do a serious buyback, it's time to do a serious dividend and start with a big special dividend or a commitment to a regular annual dividend.

Albert Chen -- Chief Financial Officer

Well, I mean, as I mentioned in the -- in response to the prior questions, we have constantly looked at the capital-allocation decisions. And it doesn't mean that the capital-allocation decision with respect to the dividend policy is carved in stone, but it is certainly something that we'll constantly review. Investors may like it, investors may not like it, but at the same time, we have to consider long -- overall, the long-term development need of the company. I think this is a good starting point, as I said earlier on.

If investors don't like it, then I guess we'll look at it again in the future.

Peter Halesworth -- Heng Ren -- Portfolio Manager

Well, I would just like to say your share price is what your corporate governance is and what your capital-allocation policy is. It's not what the fundamentals are. If the fundamentals were driving the stock, it'd be well over $20 a share. But instead, because of poor corporate governance and unfathomable capital-allocation policy, we're below $10.

And I know shareholders terribly dislike this.

Albert Chen -- Chief Financial Officer

Well, it's not something that I have to -- that I can address in a -- from an earnings call perspective. I apologize for that. [Silence] Should we move for the next questions?

Operator

Sure, Albert. The next question comes from Cyrille Pichot from Altimeo. Your line is now open, please go ahead.

Cyrille Pichot de Cayeux -- Altimeo Asset Management -- Managing Director

Hello. Thank you for taking my question. Hello, Albert. Just one question -- two questions, actually.

Are you looking at some acquisition targets right now, based on the fact that you decided to change your name a few months ago, maybe abroad, I don't know, if you can just elaborate a little bit about that? And maybe is this the explanation why you are keeping this huge amount of cash in your balance sheet? It could be a good explanation, I mean. Also, are you maybe keeping your cash because potentially, in 2020 in China, there will be more province? As you know, actually, right now, there are seven licensees, so maybe there will be more opportunities and definitely you will need some cash account, of course. And just last question is about the same one [Inaudible] Qilu's stake. You hold the 24% stake in Qilu.

This is, honestly, it is completely a hidden asset for the market. I mean, only very sophisticated investor can understand the value of this stake. I know it's very complicated to do anything about that. But potentially, can you just speak about Qilu, about some metrics? Qilu, we know that they are doing a huge net income every year, based on the managing filing.

So I think it's just a shame. I mean, potentially, maybe you can try to buy the other 76%. I don't think Nanjing would be OK, but you can try. So that's it.

Thank you.

Albert Chen -- Chief Financial Officer

Well, thanks for your questions. First of all, as we talked about in our prior calls, we have changed the name from China to Global. And it also partly reflects our change in our corporate strategies. And for those of you who actually follow us in the prior earnings calls, I have talked about this in the past as well, is that we are actually in -- I will say, we are relatively active in terms of looking at potential opportunities, both inside and outside of China.

So yes, so long story short that we are looking at potential opportunities that we can leverage upon our core competencies and our core, I would say, our strength in the PRC. So, yes, we are definitely looking into that. Whether or not that actually include the Shandong Cord Blood Bank, I'm not in a position to discuss about that. But I will not rule out possibilities in both at home as well as offshore.

But obviously, doing acquisition in U.S., given our controlling shareholder is a PRC individual, may somewhat be complicated at the current juncture.

Cyrille Pichot de Cayeux -- Altimeo Asset Management -- Managing Director

Thank you.

Operator

Thank you, Cyrille. There are currently no more questions in queue. [Operator instructions] At this point, there appears to be no further questions. I will now turn the call back to Ms.

Kathy Bian. Please go ahead.

Kathy Bian -- Vice President Corporate Finance

Thank you, Anna. This concludes our earnings conference call for fourth quarter and the full year of fiscal 2018. Thank you for your participation and ongoing support. Have a good day.

Anna, you may now disconnect. Thank you all.

Operator

[Operator signoff]

Duration: 33 minutes

Call Participants:

Kathy Bian -- Vice President Corporate Finance

Albert Chen -- Chief Financial Officer

Ryan Roberts -- MCM Partners -- Analyst

Michael Schmitz -- Jayhawk Capital -- Chief Financial Officer

Peter Halesworth -- Heng Ren -- Portfolio Manager

Cyrille Pichot de Cayeux -- Altimeo Asset Management -- Managing Director

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